A Tale of Two Markets

Are your D&O premiums about to soar? That depends on which industry you're in.

Dave Hennes, director of risk management at The Toro Co., a $1.8 billion manufacturer of turf-maintenance equipment, says negotiations on his upcoming property/casualty (P&C) insurance–policy renewals, including D&O, have been about as exciting as watching grass grow. “We’re hearing from our brokers that after several years of softening prices, the market is flattening and we should expect roughly the same or slightly lower costs, as well as the same terms and conditions in the expiring policies,” he says.

No Casualties in P&C
In a bit of good news, P&C insurance (not including D&O) is posing no issue at all. “Thirty-four banks have failed since the beginning of the financial crisis; no insurers have failed,” says Robert Hartwig, president and chief economist at the Insurance Information Institute. “Banks are reducing and eliminating their lines of credit; insurers are renewing existing policies and paying claims. Not a single [P&C] claim has gone unpaid since this crisis reared.” (See “P&C Survives the Storm” at the end of this article.)

That may provide scant consolation to financial-services firms, which have little choice but to bear the extra cost for D&O coverage. Directors and officers on the losing side of a securities class action are personally liable financially for both legal defense costs and the ultimate payout or settlement. D&O insurance, particularly Side A coverage, which protects the directors and officers in the event the overall policy’s financial limits are exhausted, is vital in recruiting and retaining top-notch senior executives and board members. Despite the current economic climate, forgoing full coverage to save a few million dollars is unwise. “This is not the time to save money on premiums by taking on more D&O risk internally,” Paterson says.

Still, at a time when cash and credit are scarce, stratospheric D&O prices are adding insult to injury. “We just plunked down $17 million for our D&O, errors and omissions, and other professional liability lines, on top of much higher deductibles — $25 million for everything but the E&O, and $50 million for the E&O,” says the risk manager at an Eastern superregional bank who insisted on anonymity. Overall, the premium increase was in the 20 percent range, not too shabby, as the bank acknowledges modest subprime-mortgage exposure and was a recipient of federal TARP (Troubled Asset Relief Program) dollars.

Larger financial institutions with more-problematic risk profiles, on the other hand, are forking over veritable fortunes. “Last year we had a 90 percent premium increase in the primary layer of our D&O program, where the first few millions of dollars in a loss are absorbed, and we expect even larger price increases as we prepare for this year’s renewal,” says the risk manager at a major global financial-services firm, also off the record. “We have a blended program that combines D&O with E&O and other professional liability lines, for which we’re paying around $150,000 per $1 million of coverage in the primary layer. That’s about 18 percent or so of the amount covered, and I’m told to brace for closer to 40 percent — or $400,000 for a million in coverage — next renewal. And we’re doing much better than other firms.

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